This Insight was updated on Thursday, November 10th, with the latest developments…

It’s been a wild week in crypto. Binance, the world’s biggest crypto exchange, announced Tuesday it plans to buy FTX, a top-five crypto exchange and one of its leading rivals. The next day, it walked away. Now, a bankruptcy filing is more likely. This is a story that’s already seen a few twists and turns. So I’ve unpacked what you need to know, what the lessons are, and how you could even potentially take advantage.

What’s the backstory to all of this?

Sam Bankman-Fried (SBF, as he’s known) is an important name in crypto. Not only does he control FTX, but he also owns most of Alameda Research, a multibillion-dollar crypto fund with a big influence on the market. There’d been rumblings over the weekend that SBF’s crypto empire could be keeling over. That put massive pressure on the FTX exchange token (FTT), which at one point on Tuesday was down over 85%.

FTT price drop, Tuesday November 8th. Chart from TradingView.

When FTX first started in May of 2019, it needed a big “market maker” to provide trading liquidity to its customers. See, crypto exchanges act as a middleman between buy and sell orders. And for FTX to get big, it needed a hefty trader on its platform that could help soak up what its customers were buying or selling. That’s where Alameda came in.

The resulting liquidity attracted more traders to FTX, which helped FTX get really big, really fast. It was nothing but good times for SBF, Alameda, and FTX until recently, when it was thrown a couple of curveballs…

Curveball 1: CoinDesk’s article about Alameda's financial soundness.

A week ago, on November 2nd, CoinDesk put out an article saying there could be something fishy going on with Alameda’s bankroll. After reviewing a “private financial document”, CoinDesk reported that Alameda had $14.6 billion in assets on June 30, along with $8 billion of debt. The problem, though, is what made up those assets: the balance sheet was loaded with FTT ($3.7 billion) and “FTT collateral” ($2.2 billion). In other words, about 40% of Alameda’s assets were in a volatile token created by FTX.

This had the crypto market spinning for three reasons. First, it’s estimated that Alameda and FTX hold about three-quarters of all the FTT tokens in existence. So if Alameda needed to sell those assets to pay off their debts, the price of FTT would collapse – with too few buyers to soak up all that selling.

Second, Alameda had been borrowing money against the value of FTT, so if the price collapsed, so would Alameda – and it’s one of the biggest crypto funds around. That could cause all kinds of market contagion, just as we saw when the (smaller) crypto fund Three Arrows Capital imploded back in June.

And third, investors started worrying that Alameda could drag FTX down with it. Sure, FTX is a separate legal entity to Alameda, but because SBF owns both of them, the lines have always seemed a bit on the blurry side. And with fresh memories of crypto lending platform Celsius Network’s collapse in June, investors decided to pull their funds out of FTX in a hurry.

Curveball 2: Binance gets involved.

The Coindesk article a week ago couldn’t have come at a worse time for SBF and his crypto empire. In the background, there were whispers that he was secretly lobbying for a US crypto bill that would stringently regulate DeFi in the US, and hence starve out his competition from decentralized exchanges (DEXs) – including DEXs on the Binance Smart Chain.

The crypto community began to question SBF’s true intentions for the space. And like all of crypto’s great unravelings, things finally escalated with a Tweet – from none other than Changpeng Zhao (known as CZ), the CEO of Binance, on Monday.

There was a lot of information in that tweet – and none of it was good for FTX, Alameda, or the crypto market. As an early investor in FTX, Binance holds a massive position in FTT tokens. On November 5th, the day before CZ’s tweet, a blockchain “whale alert” showed some of that ($584 million worth of FTT) being transferred to Binance to be sold. But given the size of Binance’s FTT position, they’ve only sold a small portion so far. The tweet also showed CZ’s contempt for SBFs lobbying and, what’s more, it compared FTT to Luna – and we all know what happened there.

Caroline Ellison, CEO of Alameda, responded by saying the fund would happily buy all of Binance’s FTT for $22 a token, but CZ was having none of it. The market began to speculate that $22 was a “liquidation level” for Alameda, and once that level broke, the fund would be forced to sell FTT to cover its debts. Of course, the $22 level did break on Tuesday. After that, FTT dropped another 80% – and the overall crypto market dropped about 15%.

So what did Binance do next?

Late on Tuesday, CZ tweeted again – this time announcing that Binance would “fully acquire” FTX. We don’t know for sure whether CZ planned the whole thing, but if he did, it was a Jedi business move on his part: after a tweet that sent FTT into freefall, he could absorb one of his biggest competitors.

What does this mean for the crypto market?

It’s too soon to know exactly how this will play out for FTX, Alameda, and the rest of the market, and there’s no telling how deep this debt rabbit hole goes. This week’s drama confirmed what investors already suspected – that Alameda and FTX are in trouble. SBF wouldn’t have accepted the terms otherwise

Mind you, the deal is now off the table – after Binance put out a statement saying FTX’s issues “are beyond our control or ability to help”. Binance started a review of FTX's finances, and obviously didn’t like what it saw. But regardless of whether the deal went through or not, Alameda is still on the hook for all of its debt, so it may need to sell all its tokens (FTT and other tokens) to pay off its creditors. And since those creditors likely also have debts, that could put more downward pressure on the overall market.

What’s the lesson here?

There could still be more damage to come. It’s unclear whether all FTX users will get all their money back: the exchange could simply collapse and file for Chapter 11 bankruptcy. And if it turns out FTX hasn’t separated its customers' crypto from Alameda, there may not be much money left to pay out FTX’s users. That’s why in crypto, the phrase “not your keys, not your coins” so often rings true. Unless you’re using your crypto for trading, always opt for self-custody crypto storage solutions when you can. And remember to spread your risk by putting your crypto eggs in many different baskets.

Are there any opportunities here?

It's a bleak situation for crypto, but if you can stomach the volatility, there could be two potential long-term opportunities here.

First, this could play into Coinbase’s (COIN) hands in the long run – and that might make its stock worth a closer look now. For one thing, FTX is also a Coinbase rival, so Coinbase could also end up having less competition, depending on how things go from here. And for another, Coinbase is the only publicly listed crypto exchange in the US, so it has a lot more reporting requirements to keep it in check. I’ll be writing more about Coinbase later this week.

Second, consider that Binance just invested $500 million with Elon Musk to buy Twitter. And knowing CZ, you can be sure he did that for a very specific reason. So you could also take a look at Binance’s exchange token, BNB, which I’ve written about here.